28 June 2016

What is a financial system? It is a system that supplies money for economic activities - like buying a tractor, building a factory or starting a company. What is the need for a financial system? Only rich people have money. So a financial system is needed to provide money to ordinary people for economic activities.

The financial system is to the economy what the circulatory system is to the human body. The body needs blood to function - and the circulatory system supplies it. Similarly, the economy needs money to operate - and the financial system supplies it. Banks are the best-known part of the financial system. The stock exchange is another. There are many more.

In 2003, Raghuram Rajan and Luigi Zingales (professors of finance at the Chicago School of Business) wrote a book called "Saving Capitalism From Capitalists". In it, they argued that the best financial system is a free/unrestricted financial system - like America's. 5 years later, the 2008 American Financial Crisis happened - the worst financial crisis since 1929 (which had caused the Great Depression of the 1930s). Most economists blamed America's unrestricted financial system for this crisis.

In 2014, Raghuram Rajan wrote a 10-page afterword titled 'Lessons from the Great Recession'. In it, he talks about the recession that the financial crisis caused - rather than the financial crisis itself. Further, he blames the recession on long-term economic and political trends - rather than the financial system. He is slightly casual both about the financial crisis itself and the unrestricted American financial system that caused it.

The sub-title of the book is 'Unleashing the power of financial markets to create wealth and spread opportunity'. The authors argue that a free/unrestricted financial system (like America's) is the best financial system because it supplies the maximum money to ordinary people and small companies. On the other hand, they argue that an unfree/restricted financial system (like the European countries) supplies money only to rich people and big companies.

If this argument is correct, then America must perform better than the European countries. Is this so? America's per capita income is higher than all the European countries, yes. But the authors argue that America's free/unrestricted financial system is the best for supplying money to poor people and lifting them out of poverty. So we should look at the income of the poorest 10% of the people. And in this, America is one of the worst among the industrialised countries.

The authors may argue that the poorest 10% in Europe have a higher income due to government handouts. Then let us look at upward mobility - the degree to which the poor can come out of poverty. In this also, America is beaten by:
a) North Europe (Norway, Sweden, Finland, Denmark)
b) West Europe (Germany, France, Holland, Belgium)
c) British colonies (Canada, Australia, New Zealand)
Only South Europe (Spain, Portugal, Italy, Greece) is worse than America.

The authors may argue that this is not due to the financial system, but the larger economic system. To this, we can make two points. The first point is trivial and technical. Yes, the financial system is not an independent system. It is only the sub-system of a larger system - the economic system. But in that case, it is the performance of the system that really matters, and not the performance of the sub-system. What is the use if the sub-system works well, but the system does not?

The second point is more fundamental, about philosophy. Every country has a philosophy, and it builds all its systems (political, economic, financial, etc) on the foundation of that philosophy. No country builds one system on one philosophy, and another system on another philosophy. America is no different. And it has built both its economic system and its financial system on the same philosophy - Darwinism (ie, natural selection and survival of the fittest; or 'every man for himself, devil take the hindmost'). So it doesn't make sense to praise the financial system but criticise the economic system when both are built on the same philosophy. (Another view: You cannot expect the financial-economic system to treat ideas, products, services and industries in one way - and people in another way)

But these criticisms aside, "Saving Capitalism From Capitalists" is a very informative and interesting book about the financial system and also about economic history.

18 June 2016

Donald Trump is a real-estate tycoon with zero political experience. His campaign has been a series of stupid, ignorant and racist statements. Now he is the Presidential candidate of one of America's two political parties. He is one step away from becoming the leader of the world's most powerful country. How did this happen?

In any industrialised country, this is an automatic disqualification for politics - especially for the highest office of the land. Not in America. Why? Because Americans are the perhaps the most ignorant people among the industrialised countries. How? How can the world's most technologically and economically advanced country be the most ignorant (among its industrialised peers)?

America is the world's most techno-economically advanced country due to its scientists, engineers and managers. These are the most intelligent and knowledgeable people in the world. But they are just 1% of the country. The remaining 99% of the people (factory workers, shopkeepers, clerks, etc) are stupid and ignorant. This is due to history and geography. First, America has no history to speak of - it was born only in 1600. Second, it is cut off from the world by two oceans. Third, its population is small compared to its area. So half of Americans live in 'small towns' (actually villages) which are far from one another.

So in America, stupidity and ignorance is not a disqualification for politics - even for the highest office in the land. It can even be a qualification due to the "He is one of us" factor. Example: George W Bush.

2. White Racism

Today's America was born in 1600 - when white Europeans started going there, exterminating the natives and stealing their land. This wasn't enough. They also started 'importing' Africans and using them as slaves. This slavery went on for almost 250 years. In 1865 they stopped slavery - but didn't accept blacks as citizens. They kept blacks as non-citizens for another 100 years. Only in 1964 did blacks become citizens. So racism is deeply embedded in America's DNA.

In 1968, the Republican Party became the party of racist whites. Since then it has carried on a campaign of racist propaganda. Over half a century, this has kept racism alive in America. Enter Donald Trump with his explicit racism. Previously, Republican Party leaders (like Nixon and Reagan) were implicit in their racism. Explicit racism is a disqualification, you may think. It is not. Republican Party voters embraced Trump hysterically.

When Trump launched his campaign, the violent white racist group Ku Klux Klan (infamous for killing blacks) declared its support for him. America was horrified. Even Republican Party leaders were embarrassed by this open display of racism. They called upon Trump to denounce Ku Klux Klan and distance himself from it. Trump did nothing of the sort.

This is Trump's - well - trump card. After dominating America's politics for almost half a century, the Republican Party lost two Presidential elections in a row in 2008 and 2012. The reason was simple. Racist whites voted for the Republican Party. Non-racist whites, blacks and Latinos/Hispanics voted for the Democratic Party. Republican Party leaders did a lot of head-scratching. They came up with the solution: To win, all they had to do was somehow get the Latino vote. And how to do this? Simple: 'immigration reform' - ie, give citizenship to all the illegal Mexican immigrants.

There was just one problem. For half a century, the Republican Party had taught its voters to hate all non-whites - which is not just blacks but also Latinos. Now these voters exploded with rage. Enter Donald Trump with his solidly anti-immigration campaign. He had launched his campaign by calling Mexican immigrants as 'rapists' and 'drug-dealers'. Again, Republican Party voters embraced him hysterically.

America has 1 crore illegal Mexican immigrants. They do low-paying jobs that whites are not willing to do. Without them, many sectors of the American economy will collapse. Trump says he will deport all of them. He says he will build a wall along America's 3,000 km border with Mexico. This will cost $25 billion, but he says he will make Mexico pay for it. How? Only he knows.

4. Anti-Globalisation

Starting with the Industrial Revolution, transportation and communication technology advanced - and helped to connect all the different parts of the world together. This process accelerated after World War 2. People, goods, services, money and information started flowing freely all across the world. The world was 'becoming one'. This process is called globalisation.

Before globalisation, products were made in the place where they were sold. The 20th century was a honeymoon period for America. Being the largest Western country, it had the largest market in the world. American industry boomed and Americans prospered. With just a high school education, lakhs of lower class whites got a job as a worker in the local factory - and lived a middle class life (house + car). This was the American Dream.

After globalisation, products could be made anywhere in the world. Industry's aim is to maximise profits. The best way to maximise profits is to minimise cost. And a major cost is workers' wages. So the best way to maximise profits is to produce in a place where the wages are lowest - ie, poor countries. So multi-national companies started moving their factories from rich countries to poor countries. Specifically, America's factories started moving to China.

As a consequence, America's factory workers - ie, lower class whites - started losing their jobs. Their American Dream became a nightmare. With just a high school education, they could get only low-skilled and low-paying jobs. Today they are angry - very, very angry. Enter Donald Trump saying he will reverse all this and 'bring the jobs back from China'. Lower class whites embraced him hysterically.

What Trump says is impossible. You don't need a PhD in economics to know this. A minimum knowledge of today's world is enough. Yet a large number of Americans believe Trump and support him. Why? See point #1.

5. Christian Fundamentalism

Donald Trump has appealed to Christian fundamentalists also, even though this is not his strong point. He said his favourite book is the Bible. But when asked for his favourite verse, he didn't have an answer. In spite of this, Christian fundamentalists have also embraced him enthusiastically.

17 June 2016

In 1964, America's President Lyndon Johnson (of the Democratic Party) passed the Civil Rights Act giving equal rights to blacks. This enraged racist whites. In 1968, Republican Party leader Richard Nixon appealed to these whites and won the Presidential election. Since then, whites have been voting more for the Republican Party. It effectively became the party of the whites.

White voting in Presidential elections:

In 1980, Ronald Reagan combined the Republican Party's white racism with one more element: Christian fundamentalism. He appealed to Christian fundamentalists and won their support. He also did something else that was perhaps even more important. He made the Republican Party the party of the rich by adopting their agenda – which was mainly cutting their taxes. In a democracy, a political party has to work for the good of the majority of the people. Under Reagan, the Republican Party started working for the good of only the 1% rich. Thus it became a plutocratic party – and America became a plutocracy.

So the Republican Party became an alliance of the rich and racist-fundamentalist whites. But this was an unnatural alliance. Today 65% of America is white. In this, only 1% are rich. The remaining 65–1=64% are middle class and lower class. What do these people want from the government? They want welfare programs like Social Security, Medicare and Medicaid. Now these programs cost money. Where will the money come from? Obviously, from high taxes on the rich. But the aim of the rich is to minimise (not maximise) their taxes. Thus there is a fundamental contradiction in this alliance of the Republican Party.

Yet this strategy was extremely successful. From 1968 to 2007, the Republican Party won 7 out of 10 Presidential elections. How was this possible? Simple. The Republican Party pursued the economic agenda of the rich – ie, cuts in the top tax rate. This went against the economic agenda of the middle class and lower class whites – ie, more money for welfare programs. Yet the Republican Party got those people's votes. How? It diverted their attention from their economic agenda by pursuing their 'cultural' agenda – ie, white racism and Christian fundamentalism. Thus the strategy succeeded brilliantly for almost four decades.

So that is the ideology of the Republican Party – plutocracy combined with white racism and Christian fundamentalism. The rise of Donald Trump is nothing but the direct outcome of this process.

10 June 2016

For almost 250 years, there was something called 'American Conservatism'. It stood for small government, low taxes and free trade. And for around 150 years, it was the ideology of the Republican Party.

In 1980, Ronald Reagan made a cynical alliance with Christian fundamentalism to increase the power of the Republican Party. A bizarre cocktail of political conservatism and Christian fundamentalism became the new ideology of the Republican Party.

But there was one more, older, ingredient. In 1968, Richard Nixon had shaken hands with another devil – white racism. The undercurrent of racism has been flowing beneath the conservatism and Christian fundamentalism of the Republican Party since then.

Today the chickens have come home to roost. The expedient add-on has ended up becoming the main engine. For the first time in America's 240-year history, a blatant racist has been elected as the Presidential candidate of one of its two parties. With the triumph of Donald Trump, white racism has now become the official ideology of the Republican Party.

What happens to the other two ingredients? Christian fundamentalism is perfectly compatible with white racism. So it will continue as a co-ideology. But the political/economic plank of Trumpism – ie, the real plank – is big government, high taxes and isolationism. This is nothing but the anti-thesis of conservatism.

03 June 2016

Q: Why have Americans elected a blatant racist as their Presidential candidate?
A: Demographics.

Year

Population

Whites

Blacks

Latinos

Asians

1900

88%

12%

1%

0%

1910

88%

11%

1%

0%

1920

88%

10%

1%

0%

1930

88%

10%

1%

0%

1940

88%

10%

2%

0%

1950

88%

10%

2%

0%

1960

85%

11%

3%

1%

1970

84%

11%

4%

1%

1980

80%

12%

6%

2%

1990

76%

12%

9%

3%

2000

69%

12%

12%

4%

2010

64%

13%

16%

5%

Till 1950, America was almost 90% white. After 1950, other groups (Blacks, Latinos, Asians) started increasing in size slowly. This process accelerated after 1990 – especially with the Latinos/Hispanics. Today, whites are only 64% of America. What is even more important is the trend. If current population growth rates continue:

In 2050, non-whites will outnumber whites. Whites will still be the largest group, but they will no longer be the majority. (The US Census Bureau officially announced this last year)

So this is the #1 reason behind the rise of Donald Trump: the fear of the whites of being reduced to a minority in their 'own' country – ie, racism.